How much are you looking for?
$25,000 – $10,000,000+
Starting at 7.25%
24 – 48 Hours
What are the rates and fees for Inventory Financing?
Inventory financing rates and fees are dependent on a variety of different factors. The first factor that affects rates is the enterprise risk or credit profile of the borrowing company. Basically, the more of a financial risk that a business is considered, the harder it will be for them to qualify for any type of financing. Businesses with stronger credit history demonstrate that they are more likely to pay back the borrowed funds and are more likely to be approved for inventory financing. Next, the lender will determine the value for the type of inventory being offered for collateral by assessing the advance rate that they can offer. The more valuable the inventory, the more money that a business can borrow. Lenders will typically also consider the size of the borrowing company and the amount of money they expect to borrow from the inventory lender. Lenders are not likely going to give larger amounts of money to smaller companies unless they can demonstrate very strong credit history and financial growth. Typically, when determining the rates and fees for inventory financing, lenders will consider the following factors: profitability; cash flow; business credit; personal credit; tax and lien history; inventory churn; diversity of customer base; and quality of the inventory.
One of the first factors that a lender will consider about a borrowing business is the profitability associated with the borrower. Businesses that can demonstrate high profit margins and a consistent income from sales will have an easier time qualifying for inventory financing. Basically, if a business has a higher profit margin than their business expenses, they should be able to qualify for inventory financing.
Profitability refers to the net profit that a business can demonstrate. Net profit compares all business expenses to all income, or how much over the break-even point a business can demonstrate their profits are bringing in. Profitability is important when applying for inventory financing because businesses that can demonstrate that they are profitable are more likely to be able to make the payments agreed upon in the terms for the inventory financing. If a business cannot demonstrate profitability, the lender might not have confidence that the borrower will be able to make payments, and in turn they will increase rates and fees.
In addition to profitability, borrowing businesses that can demonstrate stable cash flow levels will have an easier time qualifying for inventory financing. Cash flow refers to the amount of working capital that a business has on hand at any given time, which can often demonstrate a business’s health. Cash flow demonstrates to a lender that a business has the funds necessary for their operating expenses, and by displaying healthy cash flow, lenders will have confidence in the borrower, which will make the lender more likely to qualify them for inventory financing.
Another important factor in determining rates and fees associated with the terms of an inventory financing agreement is the business credit of the borrowing business. Like with all lending options, businesses with a poor credit history signal to the lender that the business is a risky borrower. Lenders do not like to loan money out to risky borrowers, and the riskier a business is, the higher the rates and fees associated with the terms will be, if they are even qualified for the product. A healthy business credit report demonstrates to the lender that a business consistently keeps up with their debt and their payments, which gives lenders confidences and increases the likelihood of a borrower qualifying for inventory financing.
In addition to the business credit history, lenders will often evaluate the personal credit of the borrowing business owner. Sometimes it is not enough for a lender to see that the business credit history is strong. If the business credit is healthy, but the personal credit of the business owner is weak, a lender might not qualify the borrowing business for inventory financing. Lenders will want to see that the borrowing business owner has healthy credit in addition to the credit history of their business in order to have confidence that they will pay back the money owed.
Tax and Lien History
Another important factor that might determine the rates and fees associated with the terms in an inventory financing agreement is the tax and lien history that a borrowing business can demonstrate to a lender. If there is no tax or lien history, or the borrowing business can demonstrate that they paid off all taxes and liens, the borrowing business will have a higher chance of being qualified for inventory financing. If there are outstanding tax and liens owed, a borrowing business will likely not qualify for inventory financing.
Because the inventory is used as the collateral to secure the funds for inventory financing, the nature of the inventory itself will play a role in determining the rates and fees associated with the terms of the inventory financing agreement. Specifically, the inventory churn, or turnover rate associated with the inventory, will play a role in determining the terms of inventory financing. By considering the levels of inventory turnover, the rate of the goods sold, and the rate of purchasing inventory, a lender will determine the value to place on the inventory being used as collateral.
Diversity of Customer Base
Another important factor that lenders will consider with inventory financing is the diversity of the customer base that a borrowing business can demonstrate. Businesses that can show a reliable, consistent, diverse customer base are more likely to qualify for inventory financing with favorable rates and fees. On the other hand, businesses with limited customers or homogenous customer bases might have a harder time qualifying for inventory financing with various lenders. When applying for inventory financing, borrowing businesses will have to demonstrate their relationships with their customer base to the lender.
Quality of Inventory
In addition to the turnover of inventory and the rate of sale, the actual inventory that will be purchased itself will play a major role when determining the terms of inventory financing agreements. Specifically, the quality of the inventory plays a key role in determining the value of the inventory to a lender – the more the inventory is worth, the more the lender will offer for inventory financing. However, other factors related to the inventory itself will play a key role – like the location of the inventory (where it is stored), the ease of access to the inventory, the type of inventory, and how old the inventory is. If the inventory being purchased has a high value that will retain over time, lenders will offer more money for inventory financing applicants.
FAQ About Inventory Financing
What is inventory financing?
Inventory financing is a specific type of asset-based financing or funding product that allows businesses to secure financing through the value of a business’ inventory to make inventory purchases. This type of funding helps the cash flow of a business by freeing up existing working capital that was being used to purchase and hold inventory. This potential to add liquidity allows businesses to capitalize on the value of their inventory. Instead of using up their working capital for inventory, businesses that take advantage of inventory financing capitalize on the value of the inventory used to keep their shelves stocked.
How do you qualify for inventory financing?
The determining factors that influence the qualifying status of a business for inventory financing are the industry that the business is in and the type of inventory that is being pledged as collateral. Lenders need to determine the value of the inventory in the event that the borrowing business is not able to pay back the loan and the inventory needs to be sold to a third party. The value of the inventory that will be purchased itself is usually what the lender uses as collateral to secure the funds – the higher the value of the inventory being used for collateral, the more money that the borrowing business will receive from the lender.
How long does the application process take for inventory financing?
Although the application process may require a surplus of documents, the timeframe to secure inventory financing is typically not very lengthy. The timeframe is often dependent on the preparation of the applicant business, if the business owner has the necessary documents readily available, the application process will usually be much quicker. Recently, with the increase of Internet services that offer inventory finance options, finding the right inventory financing loan is easier than ever. One factor that might influence the speed of application decisions is the type of inventory being purchased. The inventory lender must complete a field audit to assess the value of the inventory, the time frame might be extended before the borrowing business obtains a decision.
How would you use inventory financing?
Businesses use inventory financing to free up cash flow that is held up via inventory that has yet to be sold. This type of financing is especially beneficial for businesses that turn over high quantities of especially valuable inventory because it allows businesses to receive funds immediately based on the value of the inventory on their shelves and the inventory they are attempting to purchase for the future. Inventory financing is used to cover different expenses that may arise and allows business owners to take advantage of new business opportunities by providing an influx of working capital immediately.
Is collateral required for inventory financing?
Yes, inventory financing is a specific asset-based lending product. The collateral required for inventory financing is the inventory that the loan is being secured with. The type of inventory being used as collateral and the liquidation cost of the inventory both play a large role to determine the necessary collateral.